Equality impact & DEI: what’s the difference?

By Rana Zincir Celal, EIIP Co Director

Addressing inequality needs more than Diversity, Equity & Inclusion policies

Inequality – in a social, political and economic sense – is influenced by a number of factors. The causes of inequality are systemic and rooted in wider social and economic structures. These give rise to unfair differences in the extent to which people with different characteristics (e.g. gender or race) or statuses (e.g. low paid or living in disadvantaged areas) are able to enjoy their human rights and freedoms. Tackling inequality means addressing not only the impacts of these differences but also the factors that cause them. Ultimately, that is what leads to transformative impact.

Concern with the scale and impacts of inequality is starting to influence the way that capital is being deployed, particularly within impact investing and philanthropy. SDG10 (reducing inequality), is a focus area for 69% of UK impact investors, listed fourth after health, energy and sustainable cities, according to Impact Investing Institute’s March 2022 report, “Estimating and describing the UK impact investing market.” There’s also growing recognition that across the wider spectrum of capital (e.g. sustainable, responsible and traditional investing) there needs to be recognition of the link between inequality and capital, as shown by the G7-convened Impact Taskforce’s support for the Taskforce for Inequality Related Financial Disclosures (TIFD). This is also the case for public finance, given that tackling inequality is stated as a top policy priority (e.g. the UK’s Levelling Up agenda, the Grand Challenge on Inequality and Exclusion).

The Equality Impact Investing Project was established in 2018 to support financers with identifying impact needs and financing responses to effectively address inequality. The field of equality impact investing (EII) – investing that tackles inequality – includes all forms of finance (returnable and non-returnable) that flows into the “impact economy.”

One increasingly popular way that social investors are choosing to address inequality is through better organizational Diversity, Inclusion & Equity (DEI) policies and strategies.  The Impact Investing Institute found that “92% of respondents now have a DEI policy and 76% of respondents actively track their DEI performance against measurable metrics. These figures highlight the increasing emphasis placed by companies on creating a diverse workforce and positive working environments for staff.”

However, we’d argue that, due to the unique positioning of our sector, as well as improving DEI practice, investors should prioritise more strategic and impactful opportunities to reduce inequality. Indeed, one of the key reasons that EIIP was created was to address this strategic potential to make a much more sizeable impact on inequality.

EIIP has identified five key equality impact investing strategies:

DEI is most clearly encapsulated in the EII strategy: “Improve investors own make up and practice.” This is about improving internal practice. The other four EI investing strategies present additional opportunities for investors to further advance a more diverse, equitable and inclusive society; doing so achieves greater alignment between internal progress and external facing work. While not necessarily a prerequisite for the other EII strategies, it’s easy to see why an investor will face challenges in applying the other EII strategies without also having an organisational DEI lens in place.

Let’s look more closely at what DEI consists of.

DEI entails embracing an organisational commitment that goes beyond diverse representation to inclusive and equitable culture and practice. This means incorporating DEI across organisational policies and infrastructure; staff recruitment and retention practices; and within due diligence and decision-making processes. This will need building up the DEI competencies of boards, committee members and staff.  Establishing systems for DEI management and accountability are also critical; this includes collecting data and reporting on DEI. Investors need to review how they engage stakeholders and apply DEI across their supply chain.

Across all these areas are opportunities to uproot systemic biases and power differentials which account for inequality within the social investment sector (see this report from the Diversity Forum) and inequalities in who and what is funded (as evidenced by The Adebowale Commission on Social Investment).

The 10 Actions of Diversity Forum’s Manifesto 2.0 and a new DEI toolkit for social purpose organisations now being developed by Big Issue Invest, UnLtd and Social Value UK both provide a useful roadmap for DEI.

Let’s examine what else social and impact investors can do to increase their equality impact.

With DEI, investors can improve their own internal make up and practices. With the additional EII strategies, investors shift what and who they allocate capital to.

Specifically, to improve equality impact, we need capital flowing to:

1.      Organisations led by people who are marginalised and disadvantaged

2.      Organisations and business models that drive equality outcomes, either through addressing the impacts of inequality or by dismantling the root causes of inequality. This means tackling wider processes and structures that shape inequality, not just how it manifests for individuals 

3.      Organisations with good equality practice

These strategies can be pursued separately, but one can easily imagine the potential for impact if used in combination.

Moreover, while focusing mainly on DEI or only one of the EII strategies might produce short-term results, using a transformational systems lens – or investing in “equality transformative organisations” - is most likely to produce long-term structural change.

Let’s look at structural inequality and systems change.

The way that capital has been and is allocated is a reflection of structural inequality – from who controls and decides where and how capital is deployed, to who benefits and who bears the brunt of extractivist economic and business models.

These inequalities mean that whole groups of people have been excluded from social investment, based on their race, gender, sexual orientation or ability. As a result, there is now a move to shift capital to these groups, with gender lens and racial justice investing leading this. More capital is also starting to flow to ventures which address the inequalities experienced by these groups.

Now, stepping back to consider all the ways that inequality manifests – e.g. in food systems, in education, in health, in relation to climate change or wealth and income inequality – it becomes apparent that we need approaches that tackle the wider, underlying imbalances that produce unequal outcomes. This means focusing on policies, norms and attitudes, institutional arrangements and market structures.

·        One great example is the approach of the Laudes Foundation, whose strategy and theory of change aim to accelerate the transition to a climate positive and inclusive economy. Their ambition is to influence finance and capital markets, the fashion industry and the built environment by engaging with and seeking changes in business and industry, with policy makers, in the financial sector and for workers and producers.  A DEI-lens has been embedded across and within the strategy, as part of approaches that aim to transform the conditions, structures and systems shaping their target sectors.

·        Likewise, Resolution Ventures is tackling low paid and insecure work – a feature of systemic inequality - through worker tech investments that improve the prospects, power and choices of workers. The tools and approaches pursued by the ventures complement the policy and advocacy work undertaken by the Resolution Foundation.

·        The Investment Integration Project lays out how investors can tackle systemic issues such as income inequality in their recent report, Systemic Stewardship: Investing to Address Income Inequality. This shows that investors can leverage enhanced techniques and extend traditional investment tools to confront system-level challenges.

What’s refreshing about these cases is the in-depth understanding of the main drivers of inequality within key sectors of the economy, which is used to identify levers of change that then shape strategy and ultimately investment decisions. They are going beyond DEI by infusing EII principles, strategies and knowledge in practice to bring about systemic change.

DEI can help pave the way for more inclusive and equitable social investment sector, but we need to go much further to address the harder questions of capital allocation and power imbalances in the wider economy that result in inequality. Rights Co Lab has been carrying out research on investor frameworks for DEI standards, disclosure and benchmarking for the Sustainability Accounting Standards Board (SASB). Their emerging findings point to key inequality markers being overlooked and collapsed. Meanwhile, many anti-racist activists are now calling for divestment from DEI, because it (intentionally?) absorbs enormous resources and attention away from actions that directly challenge institutional racism and wider unequal systems this sits within. They’re asking: who is really benefitting from and what is fundamentally changing with the focus on DEI?

Investors need to understand that having a robust DEI policy and strategy to bring it to life is a bare minimum: we think it’s important to sign up to the Diversity Forum’s Manifesto so that you get your houses in order. This will make the sector more representative and inclusive.

And we need you to do more: how you will redirect capital to dismantle inequality? This is where designing investment strategies for equality impact need to be at the forefront.

Are you interested in exploring how you can use social investment for equality impact? Join our next course or feel free to get in touch.